NEGOTIABLE INSTRUMENTS ACT

Q.NO.1. WRITE ABOUT DIFFERENT MODES OF TRANSFERRING A NEGOTIABLE

INSTRUMENT?
One of the essential characteristics of a negotiable instrument is that it is freely transferable
from one person to another. This transfer may take place either by negotiation or by
assignment.
1. Transfer by negotiation: When a promissory note, bill or cheque is transferred in such a way
that the transferee becomes holder thereof, the instrument is said to be negotiated (Sec.14).
There are two methods of transfer by negotiation, namely.
a. Negotiation by delivery: An Instrument payable to bearer is negotiable by delivery.
b. Negotiation by endorsement & delivery: An Instrument payable to order is
negotiable by endorsement and delivery thereof.
To complete negotiation, delivery of the negotiable instrument is essential whether the
instrument is payable to bearer or order. The delivery must be voluntary.
Every promise on a bill, whether made by drawer or acceptor or an endorser is not
complete and can be revoked till the delivery of the instrument [Section 21(1) (English)
Bills of Exchange Act]
E.g.: X was the holder of a cheque of ` 10,000 payables to bearer. He delivered this cheque to Y to
keep it in his (Y) safe custody. In this case there is no negotiation of cheque from X to Y because
the transfer of the cheque to Y makes him a bailee only and not the holder of the cheque.
2. Transfer by assignment: An instrument is said to be assigned when a promissory note,
bill of exchange of cheque is transferred by means of a written and registered document
under the provisions of the Transfer of Property Act, 1882. The person who transfers his
right to recover the payment of debt is called assignor and the person to whom such
rights are transferred is called an assignee. The assignee gets the rights of assignor only.
He does not get the rights of a holder in due course. Thus where the holder of an
instrument transfers it to another so as to give a right to transferee to receive payment on
the Instrument, it is called transfer by assignment. The Negotiable Instruments Act does
not deal with transfer of negotiable instruments by assignment.
Duration of Negotiability [Section 60]: A negotiable instrument may be negotiated:
a. By the maker, drawee or acceptor until maturity.
b. By person other than maker, drawer or acceptor until payment.
Q.NO.2. NEGOTIATION VS.ASSIGNMENT.
Basis of distinction Negotiation Assignment
1. Consideration In case of negotiation it is presumed.
[section 118]
In case of assignment, consideration
is to be proved.
1
2. How to efect Instruments payable to bearer are
negotiated by mere delivery and
instruments payable to order are
negotiated by endorsement and
delivery.
Assignment is always done by means
of a written and registered document
under the provisions of Transfer of
Property Act, 1882.
3. Where to efect Negotiation can be done in respect of
negotiable instruments only.
Assignment can be done in case of
other documents also.
4. Notice Notice of transfer to the debtor by the
transferee is not necessary.
An assignment does not bind the
debtor unless notice of assignment
has been given by the assignee to the
debtor and the debtor in turn
expressly or impliedly has assented.
5. Title The title of the holder in due course is
better than that of transferor.
The title of the assignee is subject to
all equities in the title of assignor. In
other words, assignee gets the rights
of assignor only.
Q.NO.3. DEFINE THE TERM ENDORSEMENT? WRITE DOWN THE ESSENTIAL FEATURES
OF VALID ENDORSEMENT? WRITE ABOUT DIFFERENT TYPES OF ENDORSEMENT?
In ordinary language, the term endorsement means writing on an instrument. But according
to Negotiable Instruments Act it means writing of a persons name (otherwise than as maker)
on the face or back of a negotiable instrument or on a slip of paper (called allonge) annexed
thereto, for the purpose of negotiation (Sec.15). The person who so signs is called endorser
and the person to whom the instrument is endorsed is called endorsee.
Essentials of valid endorsement:
a. It must be on the instrument itself. If no space is left on the instrument, it must be on a
separate slip of paper attached to the instrument, called allonge.
b. It must be signed by the endorser for the purpose of negotiation. Signature of the
endorser on the instrument, without any additional words, is sufcient.
c. It may be made by simply signing his name on the instrument or he may additionally
specify the person to whom or to whose order the instrument is payable.
d. It must be completed by the delivery of the instrument. The delivery of the instrument
with the intention of passing the property in it to the endorsee is important.
Kinds of endorsement: Endorsement may be of the following kinds:
1. Blank or general endorsement: Endorsement is said to be blank or general if the endorser
signs his name only on the face or back of the instrument and the instrument becomes a
bearer instrument.
2. Full or special endorsement: If the endorser signs his name and adds a direction to pay
the amount mentioned in the instrument to, or to the order of a specifed person, the
endorsement is said to be in full. For example, Pay Ram or order or Pay to Ram.
2
Conversion of endorsement in blank into endorsement in full: If an instrument has been
indorsed in blank, any holder may, without signing his own name, write some persons
name above the endorsers signature and so convert the endorsement in blank into an
endorsement in full. Thus the holder does not incur the responsibility of endorser.
E.g.: A is the holder of a bill indorsed by B in blank. A writes over Bs signature, the word Pay to
C or order. A is not liable as an endorser but such writing operates as an endorsement in full
from B to C
3. Restrictive Endorsement: An endorsement is said to be restrictive when it prohibits or
restricts the further negotiability of the Instrument. It merely entitles the holder of the
instrument to receive the amount on the instrument for a specifc purpose.
E.g.: Pay the contents to C only Or Pay C for my use
4. Partial endorsement: When an endorsement transfers to the endorsee only a part of the
amount of the instrument, the endorsement is said to be partial. Partial endorsement
does not operate as negotiation of the instrument. However, if the instrument has been
paid in part, the fact of part payment may be endorsed on the instrument and it may be
further negotiated for that residue amount.
E.g.: A is the holder of a bill for ` 1,000. He indorses it thus: Pay B or order ` 500. This is a
partial endorsement and is Invalid for the purpose of negotiation.
E.g.: Pay B ` 500, being the unpaid balance of the bill. This is a valid endorsement.
5. Conditional endorsement: An endorsement is conditional or qualifed if it limits or
negatives the liability of the endorser. Conditional endorsement is not same thing as
restrictive endorsement. Restrictive endorsement places restriction on the negotiability of
the instrument while conditional endorsement limits or negatives the liability of the
endorser. An endorsement may be conditional or qualifed in one of the following ways:
a. Sans recourse endorsement: The holder of a bill may indorse it in such a way that he
does not incur the liability of an endorser to the endorsee. He can do so by adding
the words sans recourse (without recourse) to the endorsement. Examples of such
endorsement are Pay A or order without recourse to me or Pay A or order sans recourse or
Pay A or order at his own risk.
Here if the instrument is dishonoured the subsequent holder or endorsee cant claim
the endorser for payment of the same.
b. Liability dependent on contingency: An endorser may endorse an instrument in such
a way that his liability depends upon the happening of a specifed event which may
or may not happen. For example, the holder of a bill may endorse it that Pay A or order on
the arrival of the ship VICTORY at Bombay or Pay A or order on his marriage with B. In
all these cases, the liability of the holder as an endorser would arise only upon the happening
of the event specifed.
c. Facultative endorsement: Where an endorser by express words abandons some right or
increases his liability under an instrument, the endorsement is called facultative
endorsement. For example, Pay A or order, notice of dishonour waived is a facultative endorsement.
3
d. Sanc Frais endorsement: An endorsement is said to be sans frais endorsement if the
endorser endorses the instrument in such a way that no expenses should be incurred
on account of the bill.
E.g.: Pay B or his order sans frais..
Who may Endorse/Negotiate [Sec.51]: Every sole maker, drawer, payee or endorsee, or all of
several joint makers, drawers, payees or endorsees of a negotiable instrument may endorse
and negotiate the same if the negotiability of such instrument has not been restricted or
excluded, as mentioned in Section 50 [Section 51]. In other words, a stranger (i.e., a person
other than those stated above) cannot endorse a negotiable instrument. If a stranger endorses
it, the endorsement is void and he cannot be made liable as endorser. [Thakersey v. kishandas]
Cancellation of endorsement: Where the holder of a negotiable instrument, without the
consent of the endorser, destroys or impairs the endorsers remedy against a prior party, the
endorser is discharged from liability to the holder to the same extent as if the instrument had
been paid at maturity (Sec.40).
E.g.: A is the holder of a bill of exchange made payable to the order of B. which contains the following
endorsements in blank:
1
st
endorsement - B, 2
nd
endorsement C, 3
rd
endorsement D, 4
th
endorsement - E.
A puts this bill in suit against C and strikes out, without Es consent, the endorsements by C and D.
A is not entitled to recover anything from E.
Q.NO.4. STATE THE PROVISIONS RELATING TO MATERIAL ALTERTION.
Meaning of Material Alteration: An alteration can be called a material alteration if it alters or
attempts to alter the character of the instrument and afects or is likely to afect the contract which
the instrument contains or is evidence of. Thus, it totally alters the business efect of the
instrument.
Material Alteration Non-material alteration
1. Alteration of date of instrument (e.g. if a bill
dated 1
st
May, 1998 is changed to a bill dated
1
st
June, 1998.)
2. Alteration of time of payment (e.g., if a bill
payable three months after date is changed to
a bill payable four months after date).
3. Alteration of place of payment (e.g. if a bill
payable at Delhi is changed to bill payable at
Bombay.
4. Alteration of amount payable (e.g., if bill for `
1000 is changed to a bill for ` 2000)
5. Conversion of blank endorsement into special
endorsement.
6. Addition of a new party to an instrument.
7. Alteration of one of the clauses of the
1. Conversion of order instrument into bearer
instrument.
2. Conversion of bearer instrument into order
instrument.
3. Elimination of the words or order from an
endorsement.
4. Addition of the words on demand to a note
in which no time or payment is expressed.
4
instrument containing a penal action.
Material Alterations Authorised by Act [Section 20, 49, 125]: Following material alterations
have been authorised by the Act and do not require any authentication:
a. Filing blanks of inchoate instrument [Section 20]
b. Conversion of a blank endorsement into an endorsement in full [Section 49]
c. Crossing of cheques [Section 125]
Efect of Material Alteration [Section 87 and 88]: An instrument which is materially altered
becomes void against all persons who were parties to it at the time of alteration and did not
consent to it. The efect of material alteration on liability of various parties is summarized
below:
Person Efect
I. Person who were parties at the time of
alteration and did not consent to alteration.
II. Persons who were parties at the time of
alteration and persons who became parties to
the instrument subsequent to the alteration.
Such persons are altogether discharged from
liability under that instrument. Such persons shall
not be liable even to a bonafde purchaser of the
instrument having no notice of alteration. [Section
87]
Such persons continue to be liable under the
instrument.[Section 88]
Q.NO.5. STATE THE LEGAL PROVISIONS REGARDING INSTRUMENTS OBTAINED BY
UNLAWFUL MEANS?
1. Stolen instruments: A person, who obtains a negotiable instrument by theft, can neither
enforce payment on it against any party thereto nor can he retain it. He acquires no title
to the instrument. If he obtains payment on it, the true owner can recover the amount
due on the instrument from him.
2. Instruments obtained by coercion or fraud: It is of the essence of all contracts, including
negotiable instruments, that they must be brought about by free consent of parties
competent to contract.
If the maker or acceptor prove that it was obtained from him by fraud, the person
defrauding cant recover anything. But the defence of coercion or fraud cant used against
holder in due course or a holder deriving title from such holder.
3. Instruments obtained for unlawful consideration: The general rules of legality of object
or consideration of a contract apply to contracts of negotiable instruments also. A
negotiable instrument given for illegal consideration, or opposed to public policy, or
immoral, or specially prohibited by statute, is void and creates no obligation between the
parties thereto. But a holder in due course obtains a good title to an instrument.
4. Forged Instruments: Forgery is the fraudulent making or alteration of a writing to the
prejudice of another mans right. The most common ways of forgery are:
a. Fraudulently writing the name of an existing person;
b. Signing the name of a fctitious or a non-existing person, with a fraudulent intention
of creating belief that the instrument was signed by a real person; or
5
c. Signing ones own name with the intention that the signature should pass for the
signature of another person of the same name.
If any of the signatures on a negotiable Instrument are forged, the signature in question is
wholly inoperative and no person, even if acting in good faith, can acquire any rights under
it.
Q.NO.6. DEFINE THE TERM PRESENTMENT. STATE DIFFERENT TYPES OF
PRESENTMENT?
Presentment means showing an instrument to the drawee, acceptor or maker for acceptance,
sight or payment. Thus there will be 3 kinds of presentment:
1. Presentment of bills of exchange for acceptance,
2. Presentment of promissory notes for sight,
3. Presentment of negotiable instruments for payment,
Q.NO.7. WRITE DOWN THE LEGAL PROVISIONS RELATING TO PRESENTMENT OF A
BILL FOR ACCEPTANCE?
A bill is said to be accepted when drawee puts his signature on it signifying his assent to the
order of the drawer that he will pay the bill at the time when it is due. The liability of drawee
does not arise until he has accepted the bill.
The essentials of a valid acceptance are as follows:
1. It must be written on the bill. A bill is generally accepted by writing the word accepted
across the face or on the back of the bill and signing his name underneath.
2. It must be signed by the drawee personally or through a duly authorised agent.
3. The accepted bill must be delivered to the holder.
In the following cases, a bill must be presented for acceptance:
1. A bill payable some period after sight or after presentment (Sec.61) in order to fx its date
of maturity. It may, however, be negotiated before acceptance.
2. A bill in which there is an express stipulation that it shall be presented for acceptance
before it is presented for payment.
Even in cases where presentment is optional, it is always desirable to get a bill accepted as
soon as possible in order to obtain the additional security of the acceptors name on the bill.
Presentment for acceptance must be made at a reasonable hour on a business day and before
the bill is overdue (Sec. 61).
Modes of acceptance:
a. General acceptance: An acceptance is general or absolute when the drawee does not
attach any condition or qualifcation to it. If the acceptance is not absolute, the holder
may treat the bill as dishonoured by non-acceptance.
b. Qualifed acceptance: An acceptance is qualifed where it is given subject to some
condition or qualifcation. In such a case the holder may refuse to take qualifed
acceptance and treat the bill as dishonoured by non-acceptance. If he takes qualifed
acceptance, he does so at his own risk and discharges all the parties prior to himself,
6
unless he obtains prior consent to such acceptance.
Presentment for acceptance to whom? Presentment for acceptance may be made to:
a. the drawee or
b. all or some of several drawees or
c. drawee in case of need or
d. all drawees, if there are several drawees, unless they are partners or agents of one another or
e. duly authorised agent of the drawee or
f. If drawee has died, his legal representative or
g. his Ofcial Receiver or Assignee, if drawee has been declared an insolvent.
When? If time for presentment of acceptance is specifed in the bill, it must be presented
within that time and before its maturity. Where presentment for acceptance is not obligatory,
it may be presented at any time before payment.
Where? The bill should be presented at the place which is specifed for presentment. If no
place for presentment is specifed, the bill should be presented at the drawees place of
business or residence. The holder must allow the drawee 48 hours (exclusive of public
holidays) to consider the matter.
Efect of non-presentment: When the holder of a bill fails to present it for acceptance where it
is obligatory, the drawer and all endorsers are discharged from liability to him.
When presentment for acceptance is excused:
1. The drawee cannot, after reasonable search, be found,
2. Where the drawee is dead or insolvent. But in such a case the instrument may be
presented for acceptance to the legal representative of the deceased or the assignee of the
insolvent,
3. The drawee is a fctitious person or one incapable of contracting.
Q.NO.8. WRITE DOWN THE LEGAL PROVISIONS RELATING TO PRESENTMENT FOR
SIGHT?
In case of promissory note, there is no question of acceptance because the maker himself is
the person primarily liable on it. But in case of note payable at a certain period after sight,
presentment to the maker is compulsory in order to fx its maturity. If the maker cannot be
found after reasonable search, presentment is excused and the instrument may be treated as
dishonoured. The presentment should be made during business hours on business day. In
default of such presentment, no party thereto is liable thereon to the person making such
default (Sec. 62).
Q.NO.9. WRITE DOWN THE LEGAL PROVISIONS RELATING TO PRESENTMENT FOR
PAYMENT?
Promissory notes, bills of exchange and cheques must be presented for payment to the
maker, acceptor or drawee thereof respectively, by or on behalf of the holder. In default of
such presentment, the other parties to the instrument (that is, parties other than the parties
primarily liable) are not liable to such holder.
7
Presentment for payment not necessary:
1. The maker, drawee or acceptor intentionally prevent presentment of the instrument.
2. The instrument is payable at the place of business and such place is closed on due date
during usual business hours. In such a case the presumption is that person liable to pay
wants to avoid payment.
3. The instrument is payable at a specifed place and neither the maker, acceptor or drawee,
nor any other person authorised to pay it, is present, during the usual business hours.
4. The instrument is not payable at a specifed place, and the payer cannot be found even
after due search.
5. There is a promise to pay notwithstanding non-presentment.
6. Presentment for payment is waived either expressly or impliedly before or after maturity.
7. The drawer could not sufer damage for want of presentment.
8. The bill is dishonoured by non-acceptance.
9. The drawer is fctitious person.
10. The drawer and the drawee is the same person.
11. Presentment becomes impossible.
In all these cases, instrument is deemed to be dishonoured on the due date for presentment.
Rules regarding presentment for payment:
1. Presentment must be made during usual hours of business and in case of cheque during
banking hours.
2. A promissory note or bill payable at a specifed period after date or sight, must be
presented for payment at maturity (Sec.66). Even little bit of delay discharges all prior
parties other than those primarily liable.
3. A note payable by instalments must be presented for payment on the third day after the
date fxed for payment of each instalment. If any instalment is not paid on such
presentment, it has the same efect as non-payment of a note at maturity.
4. Presentment for payment must be made:
At the place of payment specifed in the instrument,
If no place is specifed, at the place of business (if any), or at the usual residence of
the maker, drawee or acceptor as the case may be.
In any other case (i.e., when the maker, drawee or acceptor has no known place of
business or fxed residence and no place is specifed in the instrument) wherever the
maker, drawee or acceptor can be found.
5. A cheque must be presented at the bank. To charge any person except the drawer, the cheque
must be presented within a reasonable time after its delivery by such person (Sec. 73).
6. A negotiable instrument payable on demand must be presented for payment within a
reasonable time after it is received by the holder (Sec. 74).
7. Instrument may be presented to the duly authorised agent of the drawee, maker, or
acceptor, as the case may be. Where the drawee, maker or acceptor has died, instrument
may be presented for to his representative or where he has been declared as insolvent, to
his assignee.
8. Delay in presentment for payment is excused if it is caused by circumstances beyond the
control of the holder
Q.NO.10. WRITE ABOUT ACCEPTANCE FOR HONOUR.
8
Acceptance for honour [Section 108 to 112]: An acceptance is said to be an acceptance for
honour if the following conditions are fulflled.
a. The bill must have been noted or protested for non-acceptance or for better security.
b. The acceptance must be made for the honour of any party already liable under the bill;
c. The acceptance must be made by any person who is already not liable under the bill;
d. The acceptance must be made with the consent of the holder of the bill;
e. The acceptance must be made in writing on the bill;
f. The person desiring to accept for honour must have declared that he accepts under
protest, the protested bill, e.g. accepted upon protest.
Note: Where the acceptance does not express for whose honour it is made, it shall be
deemed to be made for the honour of the drawer. [Section 110]
Acceptor for Honour: The person who accepts the bill for honour is called acceptor for
honour.
Rights and Liabilities of Acceptor for Honour: The rights and liabilities of acceptor for
honour are as follows:
a. An acceptor for honour binds himself to all parties subsequent to the party for whose
honour he accepts to pay the amount of the bill. [section 111]
b. Such party and all prior parties are liable in their respective capacities to compensate the
acceptor for honour for all losses or damages sustained by him in consequence of such
acceptance. [Section 111]
c. But an acceptor for honour is not liable to the holder of the bill unless it is presented or
(in case the address given by such acceptor on the bill is a place other than the place
where the bill is made payable) forwarded for presentment, not later the next day after
the day of its maturity. [Section 111]
d. An acceptor for honour cannot be charged unless the bill has, after its maturity, been
presented to the drawee for payment and has been dishonoured by him, and noted or
protested for such dishonour. [Section 112]
Q.NO.11. WHAT IS MEANT BY PAYMENT FOR HONOUR IN RESPECT OF A BILL
OF EXCHANGE. WHEN CAN THE PAYMENT FOR HONOUR BE MADE? WHAT ARE
THE RIGHTS OF PAYER FOR HONOUR?
Payment for Honour [Sec.113]: A payment is said to be payment for honour if the following
conditions are fulflled:
a. The bill must have been noted or protested for non-payment;
b. The payment must be made for the honour of any party already liable under the bill;
c. The payment must be made by any person whether he is already liable on the bill or not;
d. The person paying or his agent must have declared before Notary Public the party for
whose honour he pays;
e. Such declaration must have been recorded by such Notary Public.
Payer for Honour: The person who buys the bills for honour is called the payer for honour
9
Rights of Payer for Honour [Sec.114]: Any person so paying is entitled to all the rights of the
person who was holder at the time of payment of the bill. The person who has paid for
honour can recover the following from the party for whose honour he has paid:
a. All sum paid on the bill,
b. Interest thereon,
c. All expenses properly incurred in making such payment (Sec. 114)
Thus he is entitled to all rights of a holder on the bill;
Q.NO.12. ACCEPTANCE FOR HONOUR VS. PAYMENT FOR HONOUR.
First write briefy about Acceptor for honour and payment for honour.
Acceptance for Honour Payment for honour
Acceptance for honour can be made only by the
party who was not already liable on the Bill.
Payment can be made by any one, including a
person who was liable.
Acceptance for honour is naturally before Bill is
due.
Payment for dishonour is only after Bill is due but
not paid.
Consent of holder of a bill is necessary to
acceptance for dishonour.
Consent of holder is not necessary in case of
payment for dishonour.
In case of acceptance for honour, if name in whose
honour acceptance is made is not mentioned, it is
deemed to be for honour of drawer. Thus,
mentioning name is not essential.
In case of payment for dishonour, name for whose
honour payment is being made must be declared
before a notary public, before making payment.
Acceptor for honour is entitled to get
compensation for all loss and damage sustained
by him.
Person paying the bill gets all rights of person
who was holder of the bill at the time of payment
made by him. He can recovers sums paid, interest
and expenses from party in whose honour he
made payment.
Q.NO.13.WHAT IS MEANT BY DISHONOUR BY NON-ACCEPTANCE & DISHONOUR
BY NON-PAYMENT?
A bill may be dishonoured by non-acceptance (since only bills require acceptance) or by non-
payment. A promissory note and a cheque are dishonoured by non-payment only. When a
negotiable instrument is dishonoured, the holder must give a notice of dishonour to all prior
parties in order to make them liable on the instrument. If he fails to do so, except in cases
when notice of dishonour may be excused, he loses his right of action against all such prior
parties.
Dishonour by non-acceptance: A bill of exchange is dishonoured by non-acceptance in any
one of the following ways:
a. If the drawee does not accept the bill within 48 hours from the time of presentment
though it is duly presented for acceptance;
b. If there are several drawees (who are not partners) and all of them do not accept;
c. When presentment for acceptance is excused, and the bill is not accepted;
d. When the drawee is incompetent to contract;
e. When the drawee gives a qualifed acceptance;
10
f. When the drawee is a fctitious person or
g. When the drawee cant be found after reasonable search.
If a drawee in case of need is mentioned in a bill, the bill is not deemed to be dishonoured
unless it is dishonoured by such drawee in case of need also.
Dishonour by non-payment: An instrument is said to be dishonoured by non payment in
any one of the following circumstances:
a. When the primarily liable (i.e. the maker of the note or acceptor of the bill or drawee of
the cheque) makes default in payment, when required to pay the same. (Sec.92)
b. When presentment for payment is excused and the instrument remains unpaid on the
due date. (Sec.76)
Q.NO.14. WRITE DOWN THE LEGAL RULES REGARDING NOTICE OF DISHONOUR?
When a negotiable instrument is dishonoured either by non-acceptance or by non-payment,
the holder of the instrument must give a notice of dishonour to all prior parties whom he
wants to make liable on the instrument. If he does not give this notice, except in cases when
notice of dishonour may be excused, all the prior parties liable thereon are discharged from
their liability.
Notice by whom?
a. Notice by holder or any prior party: Notice of dishonour may be given by the holder or
any of the parties liable on the instrument.
b. Chain method of giving notice of dishonour: A party receiving notice of dishonour must,
in order to render any prior party liable to him, give notice of dishonour to such prior
party within a reasonable time, unless such party otherwise receives due notice (Sec. 95).
But if the notice is given by a stranger it is a nullity.
c. Notice by principal or agent: If an instrument is deposited with agent for presentment
and it is dishonoured, the notice of dishonour may be given either by the agent or by the
principal himself.
Notice to whom?
a. Notice of dishonour must be given to all the parties whom the holder wants to make
liable. Notice of dishonour need not be given to the acceptor of a bill of exchange or to
the maker of a promissory note or the drawee of a cheque (Sec.93), because they are the
parties primarily liable upon the Instrument.
b. Notice of dishonour may be given to the party liable or his duly authorised agent, or,
where he died, to his legal representative, or, where he has been declared insolvent, to his
assignee.
Form of notice:
a. The notice of dishonour may be oral or written. If it is written, may be sent by post. If it is
duly directed and sent by post, it would be good notice even though it is miscarried.
b. It may be in any form but it must clearly indicate that the instrument has been
dishonoured and in what way and that the party to whom such notice is being given will
be liable on the instrument.
c. It must be given within a reasonable time at the place of business or in case such party
11
has no place of business at the residence of the party. When delay is caused by
circumstances beyond the control of the party then notice is excused.
When notice of dishonour not necessary: In the following cases, notice of dishonour for
acceptance or payment is not necessary (Sec. 98)
a. When it is dispensed with by the party entitled thereto ( i.e. he waives his right either
expressly or by implication)
b. When drawer has countermanded payment, it is not necessary to send notice to drawer
in order to charge him, as he himself has countermanded payment ( Countermand
means revoked or cancelled)
c. When the party charged could not sufer damage even if notice is not given (e.g. in case of
accommodation bill, accommodated party will not sufer even if notice of dishonour is not
given)
d. When the party entitled to notice cannot be found even after due search; or it is not
possible to give notice because of unavoidable reasons (e.g. unavoidable circumstances
like death, serious illness, accident etc.)
e. If acceptor is drawer, it is not necessary to give notice to drawer to charge him, as he
himself had dishonoured the instrument.
f. When the party entitled to notice, knowing the facts, promises unconditionally to pay the
amount due on the instrument (Sec.98).
Q.NO.15. DEFINE THE TERMS NOTING AND PROTESTING?
Noting: When a promissory note or bill is dishonoured, the holder can, after giving due
notice of dishonour, sue any or all prior parties liable thereon. But before he does that, he
may get the fact of dishonour authenticated by noting by a Notary Public. In such a case the
Notary makes a formal demand upon the maker or drawee or acceptor, for acceptance or
payment, as the case may be. On refusal, he records the noting on the instrument. Thus
Noting means recording of the fact of dishonour by a Notary Public upon the instrument,
or upon a paper attached thereto or partly upon each, within a reasonable time after
dishonour (Sec. 99, para1)
Noting must contain the following particulars:
a. the fact of dishonour.
b. the date of dishonour.
c. the reasons, If any, assigned for such dishonour.
d. if the instrument has not been expressly dishonoured the reason why the holder treats it
as dishonoured; and
e. the Notarys charges (Sec. 99. para 2).
Noting is not compulsory in case of Inland bill or note. Even if the instrument is not noted
the holder does not lose his rights.
Protest: When a promissory note or bill of exchange has been dishonoured by non-
acceptance or non-payment, the holder may, within a reasonable time, cause such dishonour
to be noted and certifed by a Notary Public. Such certifcate is called protest. The protest is
12
the formal notarial certifcate attesting the dishonour of a bill or note. It is based upon
noting.
Contest of Protest (Section 101): A protest under Section 100 must contain:
a. either the instrument itself, or a literal transcript of the instrument and of everything
written or printed thereupon;
b. the name of the person for whom and against whom the instrument has been protested;
c. a statement that payment or acceptance, or better security, as the case may be, has been
demanded by the Notary Public; the terms of his answer, if any, or a statement that he
gave no answer, or that he could not be found;
d. When the note or bill has been dishonoured, the place and time of dishonour, and when
better security has been refused, the place and time of refusal;
e. the subscription of the Notary Public making the protest;
f. in the event of acceptance for honour or of a payment for honour, the name of the person
by whom, of the person whom and the manner in which, such acceptance or payment
was ofered and efected.
A Notary Public may make the demand mentioned in clause (c) under this section either in
person or by his clerk or, where authorized by agreement or usage, by registered letter.
Time: (Sec. 100) Protest must be done with in a reasonable time.
Notice of Protest (Section): When a promissory note or bill of exchange is required by law to
be protested, notice of such protest must be given instead of notice of dishonour, in the same
manner and subject to the same conditions, but the notice may be given by the Notary Public
who makes the protest.
Protest For Foreign Bills (Sec.104): Foreign bills of exchange may be protested for dishonour
when such protest is required by the law of the place where they are drawn.
Protest for better security: When the acceptor of a bill has become insolvent or his credit has
been publicity impeached, before the maturity of the bill, the holder may, within a reasonable
time, through a Notary Public, demand a better security from the acceptor. If the acceptor
refuses to give better security, the fact may also be noted and certifed by the Notary Public.
Such certifcate is called a protest for better security. The acceptor is not bound to give such
security. If the acceptor refuses to give better security, the holder has no immediate right of
action against the drawer and the endorsers. He shall wait till the maturity of the bill.
Advantages of protest:
a. It gives an evidence of dishonour to the drawer and endorsers.
b. In a suit upon an instrument being dishonoured, the court shall, on proof of protest,
presumes to be dishonoured, unless and until such fact is disproved.
Q.NO.16. WHEN DOES A NEGOTIABLE INSTRUMENT GETS DISCHARGED?
The term discharge in relation to a negotiable instrument is used in two senses, viz.
a. discharge of the instrument, and
b. discharge of one or more of the parties from their liability on the instrument.
13
An instrument is said to be discharged when all rights of action under it are completely
extinguished and when it ceases to be negotiable. This would happen when the party who is
ultimately liable on the instrument is discharged from liability. In such a case, even a holder
in due course does not acquire any rights under the instrument. If, on the other hand, one or
more of the parties is/are discharged from liability, the instrument continues to be
negotiable and the other parties continue to be liable on it.
Discharge of the instrument:
1. By payment in due course: This is the most usual mode of discharge of an instrument
and of the parties to it. The instrument is discharged by payment made in due course by
the party who is primarily liable to pay. If payment is made by a party who is
secondarily liable does not discharge the instrument. The person entitled to receive
payment has to present the instrument for payment. On payment he is entitled to have
the instrument and keep it with him.
Payment of interest: If rate of interest is specifed in the note or bill, interest shall be
calculated at such rate on the principal amount from the date of the instrument to the date
of realisation of amount (Sec.80). If no rate is specifed, interest has to be calculated @ 18%
p.a.
2. Primarily liable becoming holder: If the maker of a note or the acceptor of a bill becomes
its holder at or after its maturity, the instrument gets discharged.
3. By express waiver: When the holder of a negotiable instrument at or after its maturity
absolutely and unconditionally renounces in writing or gives up his rights against all the
parties to the instrument, the instrument is discharged. The renunciation must be in
writing.
4. By cancellation: Where an instrument is intentionally cancelled by the holder or his
agent and the cancellation is apparent thereon, the instrument is discharged.
Cancellation may take place by crossing out signatures on the instrument, or by physical
destruction of the instrument with the intention of putting an end to the liability of the
parties to the instrument.
5. By discharge as a simple contract: A negotiable instrument may be discharged in the
same way as any other contract for the payment of money. This includes, for example,
discharge of an instrument by novation or rescission or by expiry of period of limitation.
Q.NO.17. WHEN DOES THE PARTIES TO A NEGOTIABLE INSTRUMENT GET
DISCHARGED?
A party or parties to a negotiable instrument is/are discharged in any one of the following
ways:
1. By payment: When payment on an instrument is made in due course, both the
instrument and the parties to it are discharged.
2. By cancellation: When the holder of a negotiable instrument or his agent cancels the
name of a party on the instrument with an intention to discharge him, such party and all
14
subsequent parties, who have a right of recourse against the party whose name is
cancelled, are discharged from liability to the holder.
3. By release: Where the holder of a negotiable instrument releases any party to the
instrument by any method other than cancellation, the party so released is discharged
from liability.
4. By allowing drawee more than forty-eight hours: If the holder of a bill of exchange
allows the drawee more than 48 hours (exclusive of public holidays), to consider whether
he will accept the same, all previous parties not consenting to such allowance are
discharged from liability to such holder.
5. By non-presentment of cheque: Where a cheque is not presented by the holder for
payment within a reasonable time of its issue and the drawer sufers actual damage
through the delay because of the failure of the bank, he is discharged from liability to the
extent of such damage. To know what is reasonable time, one has to consider the nature
of the instrument, the usage of trade and of bankers and the facts of the particular case.
Ex: A draws a cheque for ` 1,000, and when the cheque ought to be presented, has funds
at the bank to meet the cheque. The bank fails before the cheque is presented and pays 25
paise in the rupee. The drawer is discharged to the extent of ` 750.
6. Parties not consenting discharged by qualifed acceptance: If the holder of a bill of
exchange acquiesces (assents) to a qualifed acceptance, all the previous parties whose
consent is not obtained to such acceptance are discharged from liability (Sec.86).
7. By operation of law: This includes discharge:
a. By an order of Insolvency Court: discharging the insolvent.
b. By merger: When a judgment is obtained against the acceptor, maker or indorser, the
debt under the bill is merged into the judgment debt.
c. By lapse of time: i.e., when the remedy becomes time-barred.
8. By material alteration: A material alteration of a negotiable instrument makes the
instrument void against all prior parties unless they have consented to such alteration.
9. Discharge by payment of altered instrument: When a promissory note, bill of exchange
or cheque has been materially altered but does not appear to have been so altered, or
where a cheque is presented for payment which does not at the time of presentation
appear to be crossed, payment on such an instrument discharges the party liable if he
pays according to the apparent tenor of the instrument (as altered) at the time of
payment and otherwise in due course. Such a payment cannot be questioned even if it is
proved that the instrument has been altered or that the cheque was originally crossed
(Sec. 89).
Q.NO.18. DISCHARGE OF AN INSTRUMENT VS. DISCHARGE OF A PARTY
Discharge of an instrument difers from discharge of a party in the following respects:
Basis of distinction Discharge of an instrument Discharge of a party
1. When takes place
2. Negotiability
3. Extinguishment of all
When the party who is ultimately
liable, is discharged from liability.
The Instrument ceases to be
negotiable.
All rights of action under the
When any party or parties to
an instrument is/are
discharged.
The instrument continues to be
negotiable.
All rights of action under the
15
rights of action
4. Discharge of all parties.
instrument are completely
extinguished.
Discharge of an instrument means
discharge of all parties.
instrument are not completely
extinguished.
Discharge of a party does not
mean discharge of all parties.
Q.NO.19. DEFINE THE TERMS BANKER AND CUSTOMER? STATE THE RELATIONSHIP
BETWEEN THEM?
The relationship of banker and customer begins when the customer opens an account with
the bank and deposits money that will be used to honour the orders of the customer. The
rights and duties of the bank and the customer are contractual, depending upon the nature
of the transaction.
Who is a banker? Sec 3 of the Act reads as - Banker includes any person acting as a Banker
and any post ofce savings bank.
The above defnition follows that the Negotiable Instrument Act recognises (a) a banker, and
(b) a post ofce savings bank as a banker.
The defnition of Banking and Banking Company is given by the Banking Regulation Act,
1949. It says that: Banking means the accepting, for the purpose of lending or investment, of
deposits of money from the public, repayable on demand or otherwise, and withdrawal by
cheque, draft, order or otherwise, and Banking company means any company which
transacts the business of banking in India.
An analysis of above defnition reveals that a banker is one who accepts the money from
public for the purpose of lending or investment, and repays the same by cheque or
otherwise.
Who is a customer? A customer of a bank is a person who keeps an account with the bank. It
may be a current account or a deposit account. Duration of holding an account with the bank
is not important. Thus, the moment a person opens an account with a bank, he becomes its
customer.
Legal relationship between a banker and a customer: When a customer pays money into his
account, the bank becomes a debtor to the customer (creditor). Therefore money becomes
property of the bank. The bank stands as the borrower of money from the customer. The
banker is free to do anything with the money. The bank is just liable to repay the money to
the customer when he demands it. If the bank fails to repay on demand, the customer
becomes an unsecured creditor.
Note:
a. Stale cheque can be re-validated: invalid cheque can be re-validated voluntarily by
altering the dates so as to give fresh life to cheques for another 6 months.
b. Post dated cheque: A post dated cheque remains a bill of exchange. It becomes a cheque
on the date of the cheque. Thus, the period of six months should be calculated from the
16
date the cheque bears and not when post dated cheque was handed over by drawer to
drawee
c. Cheque relates back to date of delivery of cheque: Payment by cheque which is
subsequently honoured and encashed, relates back to the date of the cheque and in law
date of payment is the date of delivery of cheque.
Q.NO.20. STATE THE LEGAL PROVISIONS RELATING TO CLEARING OF CHEQUES BY
CLEARING HOUSE?
Clearing of cheque: The aspect of clearing house is explained here, as it is impossible to
understand the concept of truncated cheque and electronic cheque, without
understanding concept of clearing of cheque.
Persons holding cheques in their names will deposit the same with their bankers. If the
cheque is on the same bank, it will be passed by the Bank itself.
However, in many cases, the cheques deposited by various customers might have been
drawn on diferent banks. The Payees Bank has to present these cheques to all the Banks on
whom cheques are drawn. Thus, presenting these cheques to hundreds of individual banks,
collecting payment from them and then crediting these amounts to individual account
holders account is practically impossible task. Hence, a system of clearing house is
developed.
All the cheques deposited with Bank (called as collecting bank) for collection are presented
for payment to drawers bank through clearing house. In large cities, function of clearing
house
is
undertaken by RBI while in other cities the function is discharged by a large bank in
that city (in many cities, the function is carried out by SBI).
Amount payable by each bank: All Banks bring the cheques to Clearing House. These are then
sorted by clearing house Bank - wise and then submitted to individual bank on whom the
cheques are drawn. These cheques are then taken by Banks to their Branch ofces. The cheques
are passed if cheque has been presented before due date, signature tallies and there is balance in
the account of drawer. The total of all the cheques passed is the total amount payable by the
Bank which is termed as Paying bank.
Return of dishonoured cheques: Some cheques presented for payment through clearing
house may be dishonoured. The cheques which are dishonoured are returned by the
drawers bank to clearing house stating reason for dishonour. These dishonoured cheques
are then given to the individual bank, which had submitted the same for payment on behalf
of its account holders.
Net amount adjusted through clearing house: Instead of paying and receiving gross amounts
via clearance house, the system is that each bank only pays or receive the Net Amount i.e.
diference between amount payable by it and amount receivable by it. This net amount is
paid/received through clearing house.
17
Q.NO.21. STATE THE LEGAL PROVISIONS RELATING TO ELECTRONIC CHEQUES?
Electronic Cheque: Provisions of electronic cheque has been made by Amendment Act, 2002.
A cheque in an electronic form means a cheque which contains the exact mirror image of a
paper cheque, and is generated, written and signed by a secure system ensuring the
minimum safety standards with the use of digital signature.
Thus the cheque can be electronically presented to Drawers Bank through electronic
clearing house. Thus, all work will be handled without paper.
Truncated Cheque: A truncated cheque means a cheque which is truncated during the
course of clearing cycle, either by the clearing house or by the bank, whether paying or
receiving payment, immediately on generation of an electronic image for transmission.
The collecting bank, instead of sending physical cheque, will send its electronic image for
clearance. In order to ensure that the cheque is not presented again, the physical cheque (i.e.
paper cheque) will be truncated. Once a paper cheque is truncated, its further movement
can be only by electronic means and not by physical movement.
Who will truncate the cheque? The truncating of cheque can be done either by bank
receiving payment or by clearing house.
Paying bank can ask for further details: Sec.64(2) provides that where electronic image is
presented, the drawee bank (i.e. bank paying the amount) is entitled to demand any further
information regarding truncated cheque from the bank holding the truncated cheque, if it
has reasonable suspicion about genuineness of apparent tenor of instrument.
Q.NO.22. TRUNCATED CHEQUE VS. ELECTRONIC CHEQUE
(a) A cheque in the electronic form means a cheque which contains the exact mirror image
of a paper cheque and is generated, written and signed by a secure system ensuring the
minimum safety standards with the use of digital signature (with or without biometrics
signature) and asymmetric crypto system.
(b) A truncated cheque means a cheque which is truncated during the clearing cycle, either
by the clearing house during the course of a clearing cycle, or by the bank whether
paying or receiving, immediately on generation of an electronic image for transmission,
substituting the further physical movement of the cheque in writing.
Following table highlights the fundamental diferences between electronic cheque and
truncated cheque.
Electronic cheque Truncated cheque
The 'electronic cheque' is never in paper form. The truncated cheque is initially a regular cheque
on paper. It is submitted to bank in usual form for
clearance.
The original writing itself is in electronic form. The truncated cheque is duly written and signed
on paper. It is subsequently converted into
18
electronic form.
Original signature is digital signature. Original signature is in ink.
Q.NO.23. STATE THE CIRCUMSTANCES UNDER WHICH THE BANKER REFUSES
PAYMENT ON HIS CUSTOMERS CHEQUES?
Cases in which a banker must Refuse to Honour a Customers Cheque: A banker must refuse
to honour a customers cheque in the following cases:
a. Stop payment: When the banker receives instructions from the customer not to honour
(i.e. stop payment) a particular cheque issued by him.
b. Garnishee order: When the banker receives a Garnishee Order, i.e., a prohibiting order by
any court attaching the money in the customers account.
c. Death: When the banker receives a notice of the death of his customer.
d. Insolvency: When the banker receives a notice of insolvency of his customer.
e. Insanity: When the banker receives a notice of insanity.
f. Assignment: When the banker receives a notice of assignment of his credit balance from
a customer.
g. Defect in title: When the banker suspects or has reason to believe that the title of the
person presenting the cheque is defective.
h. Loss of Cheque: When the banker receives a notice of Loss of cheque from his customer.
i. Material alteration: When there is a material alteration in the cheque and such
alteration has not been authenticated by his customer by putting his signature.
j. Diferent signature: When the signature of the drawer does not tally with the specimen
signature kept by the bank.
k. Notice of closure: When the banker receives a notice in respect of closure of account.
l. Irregular endorsement: When there is an irregular endorsement.
Cases in which a Banker may Refuse to Honour a Customers Cheque: A Banker may refuse
to honour a customers cheque in the following cases:
a. Insufcient funds: When funds in the customers account are insufcient to honour the
cheque presented.
b. Funds not applicable: When funds in the customers account are not applicable for the
cheque presented.
c. Presentment at diferent branch: When the cheque is presented at the branch other than
the branch at which the customer (Cheque issuing person) has the account.
d. Presentment after banking hours: When the cheque is presented after the banking hours.
e. Stale cheque: When the cheque is presented after 6 months from the date of its issue.
f. Post dated cheque: When the cheque is presented before the actual date on which it is
written to be payable.
g. Undated cheque: When the cheque is undated ( Grifth v. Dalton 1940)
Q.NO.24. WHAT PROTECTION IS GRANTED TO A BANKER PAYING THE CHEQUE?
The paying banker, in paying a cheque, bears two kinds of risks:
if the banker fails to honour a cheque that can be honoured,
if the payment of the cheque is made to a wrongful owner.
19
There is a possibility that the bank takes all the care in making payment and still the
payment reaches into wrong hands. In such cases, the bank should be protected
Protection given to a paying banker: Sec.128 says that if a banker makes a payment on a
crossed cheque in due course, he does not bear any liability thereupon even if it is found
later on that the cheque was paid to a wrongful owner. But if the payment made by the
banker is out of due course, the banker can be made liable on the cheque.
Payment in the due course:
a. Where a cheque is crossed generally, it must be paid to a banker only.
b. Where a cheque is crossed specially, it must be paid to the banker to whom it is crossed,
or his agent for collection.
c. Payment must be made in accordance with the apparent tenor of the instrument.
d. Payment must be made in good faith and without negligence.
e. Payment is made to a person who is in possession of the instrument.
f. Payment is made to the payee only when there are no circumstances to doubt.
Q.NO.25. WHAT PROTECTION IS GRANTED TO A COLLECTING BANKER?
Sec.131 of the Act reads as - where a banker receives a crossed cheque from a customer for
collection, and obtains payment on it on behalf of his customer, even if the customers title to
the cheque was defective, the banker is not liable to the true owner of the cheque if certain
conditions are met. These conditions are discussed below:
a. The collecting banker should act in good faith and without negligence.
b. The banker should collect payment for his customer only.
c. The banker should receive payment for a customer on his behalf, and thus acts as an
agent in collection of the cheque, and not as an account holder.
Example: if the banker advances money against the cheque or allows the customer to
draw against the cheque even before the cheque is realised, the banker will be the holder
for value, and not mere agent. In such case, the protection under this section is not
available.
d. The cheque collected must be a crossed cheque. The protection applies only to crossed
cheques.
Q.NO.26. STATE THE LIABILITY OF A BANKER FOR WRONGFUL DISHONOUR OF A
CHEQUE?
Sometimes it may happen that a banker declines payment of a cheque without having valid
grounds for doing so, for example, refusing payment for insufcient funds while there are
sufcient funds in the customers account. In such cases, the banker is liable for the wrongful
dishonour of the cheque.
Liability towards the drawer of the cheque: When a banker wrongfully dishonours a
cheque, he is in breach of contract with its customer, and is liable to pay damages to him.
Under general principles, damages for breach of contract are normally limited to the actual
loss sufered by the customer. And in case the customer does not sufer any loss as a
consequence of dishonour of cheque, only nominal damages are payable.
20
Damages may take a diferent dimension in the case of a cheque. That is, the drawer of a
cheque may sufer from loss of reputation because of dishonour of his cheque. In such a case,
even if the drawer does not sufer any monetary loss, loss of reputation can be measured as a
great damage. The principle is - smaller the amount of the cheque dishonoured, greater is the
loss sufered by the drawer.
Liability towards the payee (or holder) of the cheque: In the usual course, the banker is
liable to the drawer of the cheque (drawer being his customer), and not to the payee in case
of wrongful dishonour, since there is no privity of contract between the banker and the
holder. But there are two cases when a holder can take action against the banker. These are:
a. Where a banker pays a generally crossed cheque over the counter of the bank, or a
specially crossed cheque otherwise than to the banker to whom it is crossed (that is, a
payment out of due course). The banker is liable to the true owner of the cheque for any
loss he may sustain. Here true owner may be a person otherwise than a drawer.
b. Where the holder does not present the cheque with the banker within a reasonable time,
and the bank fails in the meantime, the holder of the cheque can directly prove his debt
against the banker in its insolvency proceedings. Here the drawer stands discharged as
against the holder.
Q.NO.27. ENUMERATE THE OBLIGATIONS OF THE DRAWER OF A CHEQUE?
When a person draws a cheque, he owes some duty towards the banker and the payee of the
cheque. These are discussed below:
a. He must take usual and reasonable precautions to prevent the forgery or alteration of the
cheque.
b. If he has knowledge of forgery or alteration, or any wrongful holding of the cheque, he
must inform the banker within a reasonable time.
c. When a drawer gives any information to the banker, he must check its genuineness.
Ex: Bs employee had forged many of her cheques. The banker was suspicious of the
cheques and enquired B, who answered that they were genuine. B later claimed re-
crediting of her account as the employee was in fact forging her cheques. The court held
that she herself is liable for the loss because she represented that the cheques were
genuine.
d. The customer has a general obligation to keep sufcient funds in his account to permit
the banker to honour all cheques drawn on the account. In case the customer does not
have sufcient funds in his account, and still issues a cheque to the payee, it is presumed
that the customer had no intention to make payment upon the cheque, and that the
cheque was issued in order to defraud the payee.
Q.NO.28. WHAT ARE THE PENALTIES PRESCRIBED UNDER THE NEGOTIABLE
INSTRUMENT ACT IN CASE OF DISHONOUR OF A CHEQUE FOR INSUFFICIENCY OF
FUNDS IN THE ACCOUNT OF THE PERSON ISSUING THE CHEQUE? (OR) BOUNCING OF
CHEQUES.
Sec 138 of the Act provides that when a cheque is dishonoured due to insufciency of funds
in the drawers account, such person shall be deemed to have committed ofence, and be
21
punished with imprisonment for a term which may extend to 2 years or with fne which may
extend to twice the amount of the cheque, or with both.
When an ofence under Sec.138 is constituted: To constitute an ofence under Sec.138,
following conditions must be satisfed:
a. The cheque should have been issued by the drawer to the payee in the discharge of,
(wholly or partly) of any legally enforceable debt or other liability.
b. The cheque should have been presented by the payee to the banker within the period of
its validity. Usually the validity period is three months from the date of issue of a
cheque, but if some validity period (less than three months) is specifed on the cheque,
that period is considered as validity period.
c. The cheque should have been returned by the bank unpaid, because the amount of
money standing to the credit of the account is insufcient.
d. The payee (or any other holder) of the cheque should have demanded the payment of the
amount of the cheque from the drawer, within 30 days of getting the information of
dishonour by the banker.
e. The drawer of the cheque should have failed to make payment within 15 days of the
receipt of the said notice.
Penalty:
If a cheque is dishonoured, even when presented before expiry of 3 months, the payee or
holder in due course is required to give notice to drawer of cheque within 30 days from
receiving information from bank.
The drawer should make payment within 15 days of receipt of notice. If he does not pay
within 15 days, the payee can fle a suit against drawer within 1 month from the last day
on which drawer should have paid the amount.
The penalty can be upto 2 years imprisonment or fne upto twice the amount of cheque
or both. Notice can be sent to drawer by speed post or courier.
It must be noted that even if penalty is imposed on drawer, he is still liable to make
payment of the cheque which was dishonoured. Thus, the fne/imprisonment is in
addition to his liability to make payment of the cheque.
Return of cheque should be for insufciency of funds:
a. The ofence takes place only when cheque is dishonoured for insufciency of funds or
where the amount exceeds the arrangement. Sec.146 of NI Act provides that once
complainant produces banks slip or memo having ofcial mark that the cheque is
dishonoured, the Court will presume dishonour of the cheque, unless and until such fact
is disproved.
b. If the remark is insufciency of funds or exceeds arrangement suit is maintainable. If
the remark indicates refer to drawer, it also means that funds are insufcient. However,
if there is no remark or it is ambiguous, certifcate from Banker should be obtained.
22
c. If the remark is signature does not tally, the complaint may not be maintainable. In
other cases, evidence from banker may be necessary.
d. Stop payment instructions cannot stop prosecution: Drawee can give instructions to
bank to stop payment of a cheque. This is termed as countermanding of payment. The
drawer will be liable even if he issues stop payment instructions after issue of cheque.
e. Meaning of refer to drawer: It also amounts to dishonour within the meaning of Sec.138.
Refer to drawer is only a courteous way of saying that there is no sufcient balance in
the bank
f. Ofense even if account closed: If cheque is returned with remark account closed, it
would be ofence u/s 138
Presumptions in favour of holder: Following are presumptions in favour of complainant i.e.
payee of cheque.
a. Presumption of dishonour of cheque: Once complainant produces banks slip or memo
having ofcial mark that the cheque is dishonoured, Court will presume dishonour of
cheque, unless and until such fact is disproved.
b. Presumption that cheque is for payment of liability of drawer: It shall be presumed,
unless the contrary is proved, that the holder of a cheque received the cheque of the
nature referred to in Sec.138 (i.e. for discharge, in whole or in part, of any debt or other
liability )
c. Presumption that cheque is drawn for consideration: Sec.118 also provides for
presumption that the cheque is drawn/transferred for consideration.
Notice to drawer: Notice to drawer within 30 days from receipt of information about
dishonour is mandatory. [The period was 15 days upto Amendment Act, 2002]
a. Cheque cannot be presented again after issue of notice: A cheque can be presented any
number of times during its validity period by the payee. At each presentation and its
dishonour, a fresh right accrues in favour of the person to whom cheque is issued.
However, once he gives notice to the drawer, he forfeits his right to present cheque again.
The period of one month for fling complaint will be reckoned from the day immediately
following the day on which the period of 15 from the date of the receipt of the notice by
the drawer expires.
b. Notice may include other demand also: Notice will not be invalid even if it includes
demand of other amounts like damages, interest etc., if it also includes and specifes
demand of dishonoured cheque amount.
23
c. Notice by fax: Notice can be sent by fax.
d. Presumption if notice sent by registered post: There is presumption of notice if notice is
sent by registered post and returned unclaimed.
Compounding of ofence:
a. Sec.147 of Act specifcally provides that the ofence punishable under the Act is
compoundable.
b. Compounding is essentially a compromise arrangement between complainant and
person committing an ofence. The accused and the complainant then make a joint
application to the Court that the parties have come to terms and the case may not be
proceeded with.
c. Generally, ofences which are of a private nature and relatively not serious are made
compoundable. Sec.320 of Criminal Procedure Code permits compounding of various
ofences under Indian Penal Code.
d. After payment of such composition amount, prosecution will not be launched, or if it
was launched, it will be withdrawn.
Q.NO.29. WHAT IS A STALE CHEQUE?
A cheque does not remain valid for an indefnite period of time. In India, payment on a
cheque can be claimed within a period of three months from the date it bears. If the payment
is not claimed within the above specifed period, it becomes a stale cheque.
Q.NO.30. WRITE A SHORT NOTE AN ALLONGE.
An alonge is a slip of paper annexed to an instrument on which extra endorsements are
made. Sec.15 of the Negotiable Instruments Act permits the use of such annexed slips for the
purpose of endorsements.
In fact, such a slip forms part of the instrument. Section 15 provides as follows: When the
maker or holder of a negotiable instrument signs the same, otherwise than as such maker,
for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed
thereto, or so sings for the same purpose a stamped paper intended to be completed as
negotiable instrument, he is said to endorse the same, and is called the endorser.
Recent amendments in NI Act.
Following amendments have been made under Amendment Act, 2002, by amending sections
138 and 142 and inserting sections 143 to 147:
a. Provision for imprisonment upto 2 years against present one year
b. Period for issuing notice to drawer increased from 15 days to 30 days
c. Government Nominee directors excluded from liability
24
d. Court empowered to take cognizance of ofence even if complaint fled beyond one
month
e. Summary trial procedure permitted for imposing punishment upto one year and fne
even exceeding ` 5,000
f. Summons can be issued by speed post or courier service
g. Summons refused will be deemed to have been served
h. Examination of complainant through afdavit permitted
i. Banks slip or memo indicating dishonour of cheque will be prima facie evidence unless
contrary proved.
j. Ofence can be compounded.
25